I am looking for some help regarding profit and loss forecasts and cash flow forecasts. I understand the basic differences, but im not too sure why you would need to put both in a business plan.
Would i be right in saying that a profit and loss forecast would need to be put it in to back up the cash flow forecast. Or is that in fact they show two completely different things.
I may well be way off the mark but i would appreciate any help!
I would say it is all about risk when someone else is analysing your business plan.....be it an investor or a bank etc. They need to be comfortable that there will be anough cash in the business (cash is king) but will also want to see if the business is profitable and viable. If the P&L is good and the 'cash-in' is positive and regular then all well and good.
You could though have a business that has sufficient funds now - but a poor P&L which will result in a downward spiral in terms of cash available. Alternatively, the P&L may be good, but the cashflow bad - whether this is down to bad credit control or payment terms or whatever.
Another thing to consider is (one possible 'whatever') that there may be ongoing development or capital investment. This will not show up on the P&L (although it will on the balance sheet) but it will be seen on the cashflow. Normally in a business plan or financial forecast model, the P&L, Balance sheet and cashflow will all be shown as they need to tie in with each other.
Agree with Count in that in a business plan it is normal to show profit and loss, balance sheet and cash flow. As they are all interlinked.
Normally when i do a business plan for say a new start up the bank would normally look for monthly profit and loss, cash flow and balance sheet projections over 3 years.
I myself tend to look at forecasts as a long term profit & loss projection showing how your business is going to grow over a set period of time, say 2,3 or 5 years, so I do one for each year as a summary total side by side.
Cashflows I tend to use as an immediate but ongoing projection of cash in and out on a monthly basis which interlinks with fore-casted profit & loss grow showing cash increase and that you will be able to pay your bills and perhaps if seeking finance, then proving the ability to repay that financing.
Just remember they only have to be realistic but not 100% accurate as no one can predict what will happen.
The three elements of the forecast should all be integrated to show the effect of one on the other. Ie increasing profits my not necessarily result in increased cash as increasing profits may require investment even if only in terms of materials and stock or wages. It all depends on the type of business and for whom the forecasts are intended - investors, shareholders, management etc
Sorry didnt mean to press send!! I was going to say its interesting to see that you do forecasts for 3 years down the line. Im assuming you would have reviews over that period as well to ensure they stay realistic.
Thankyou again for your help, its very much appreciated.
Yes, that would be normal. This is when things can get a bit messy though....especially when you use the 'actual' figures to update the forecast. With forecasts and budgets, it would be quite normal and expected to show 'actual v forecast'.........it might be acceptable to compare the P&L and simply the closing bank and cash balance highlighting variances. The cashflow is particularly difficult as it is pretty much a manual exercise in (in Sage anyway) to split the various types of payments/receipts. Some variances have a knock-on effect on other variances and so you need to be able to identify just what is going on..........for example if sales are way down, then purchases are probably way down which will probably mean that your accounts payables have 'improved'.....etc etc.
One reason for 'adjusting' forecasts is that say you plan to take on 6 more staff everytime the sales breach a certain figure......if the sales start looking a bit low, then it wouldn't be realistic to leave the increased labour costs in. I suppose you could look at it as a rolling forecast?
This is an interesting area though and it would be quite interesting to hear how others deal with the forecast within the forecast period.....especially comparison and reporting of cashflow.
The key difference as someone has mentioned is the timing difference between profits and cash. A highly profitable business may fail if it doesn't correctly assess its working capital and cash cycle requirement. i.e. if it is offering 60 day credit to customers and paying in advance to suppliers.
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